🇪🇺🦠A few words on yesterday's non-decision by the Eurogroup, which *unsurprisingly* underwhelms again. The EG is so NOT in agreement that they could not even agree on a conclusive statement, we only have @mariofcenteno presser to infer upon 1/
The key is the last paragraphs, where we understand that the EG is currently discussing "a Pandemic crisis support safeguard based on an existing ESM precautionary instrument, such as the Enhanced Conditions Credit Line (ECCL)"., which they say... 2/
"...would need to be consistent with the external, symmetric nature of the COVID-19 shock. This is also true for any attached conditionality. In the short term it will be targeted to coronavirus response and in the longer term, countries are expected to return to stability." 3/
This is mildly positive because it suggests at least the EG is aware of the fact that COVID-19 is a global exogenous shock that do not warrant the kind of macroeconomic conditionality that ESM lending is usually subject to. BUT...4/
...it then proceed to say "this instrument would be available for all countries to APPLY, individually". BIG problem there, because by saying one can APPLY you're also implying that one's application could be rejected, and that, my friends, is not the signal you want to send...5/
...IF your aim is to create an instrument that is appropriate to deal with this kind of shock. Regular ESM lending is intended for countries that experience funding difficulties which can be traced back at least in part to debatable domestic economic policy choices. Hence...6/
...it makes sense to have an application process where a decision is taken by the lender as to the prospective borrower is eligible/trustworthy. Here, this component of individual responsibility does not exist, so the instrument should operate differently than regular lending. 7/
Obvious counterargument: this is just a formality b/c nobody in their right mind would deny a country's application. I'd like to think so, but truth is that by having an application process you create a risk that the process is high-jacked for political reasons. It's natural. 8/
One alternative (better) option: state clearly and transparently EX ANTE that ANY country needing help will have GUARANTEED (no application) access to an ESM Pandemic Credit Line, subject to using the money for COVID-19 response. Takes both bad signalling and stigma out. 9/
So next question is: what constitutes COVID-19 response? At this point, part of it will be medical spending - but most of it will need to be support to the economy - freezing it without bankrupting it. How do you define whether this kind of spending is COVID-19 related? 10/
The easiest would probably be to agree on an estimate of how much COVID-19 shock will displace GDP from trend, and define "COVID-19 economic response" as everything (within State Aid relaxed rules) needed to re-absorb that deviation or keep it within a non-apocalyptic range. 11/
Because we have different economic systems, it would be wrong to get bogged down in discussions on e.g. how much Kurzarbeitgeld should 🇩🇪 do versus how much CIG should 🇮🇹 do et c. Absent harmonisation of social policy, thta would never (and should not) be agree at EU level. 12/
Lastly: some say we do not need this b/c we have PEPP & OMT by @ecb. I think that's wrong. PEPP gives short-term respite, but post-emergency the Q of how to refinance the extra-debt remains. This symmetric shock risks having asymmetric effects due to 'pre-existing conditions' 13/
OMT has 2 problems. It's 'monetary policy with (ESM-like) conditionality' partly out of ECB control, because it was born to cure financial fragmentation induced by idiosyncratic shocks. It's the anti-break-up tool, and as such it bears ENORMOUS stigma for those who get it. 14/
Long story short: if countries were to need a lifeline to ensure that the extra debt they will need to incur to fight COVID-19 does not hugely increase future refinancing risks asymmetrically, PEPP is not enough and both OMT and current ESM tools are not appropriate. Think new!
To answer a Q I got: the ESM credit line would still be counted as national debt (once drawn it is a loan), but you could engineer that loan to have v long (quasi perpetual) maturity and v low rateb hence reducing refinancing risk wrt refinancing of GGBs held under PEPP...
...and, if we were so inclined at any point in the future, it would be easier to pool and mutualise (or even forgive) that chunk of debt than it would be if that debt had been issued in different form/instrument under the alternative options...
...which is why the form this extra debt takes matters a lot for future implications both on cost of funding and possible mutualisation. All these discussions of form and sequencing are interrwined and need to progress together at the same time!
